AIQ: Riding The AI Growth Wave

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Global X Artificial Intelligence & Technology ETF is a passively managed ETF that focuses on AI and big data companies.Top holdings include Meta Platforms, NVIDIA, Netflix, Amazon, and IBM, with ...

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href=https://seekingalpha.com/article/4683561-aiq-etf-riding-the-ai-growth-wave><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Global X Artificial Intelligence & Technology ETF is a passively managed ETF that focuses on AI and big data companies.Top holdings include Meta Platforms, NVIDIA, Netflix, Amazon, and IBM, with ...</p>\n\n<a href=\"https://seekingalpha.com/article/4683561-aiq-etf-riding-the-ai-growth-wave\">Source 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focuses on AI and big data companies.Top holdings include Meta Platforms, NVIDIA, Netflix, Amazon, and IBM, with strong performance and growth potential.The ETF is well diversified with 87 holdings, including foreign AI stocks, and has shown strong performance over the past year.The valuations of AI stocks remain high, which represents the biggest risk to the ETF in the future.J Studios/DigitalVision via Getty Images Overview Global X Artificial Intelligence & Technology ETF (NASDAQ:AIQ) is a passively managed exchange-traded fund (ETF), tracking a market-cap-weighted index of developed-market equities involved in artificial intelligence & big data. AIQ operates as a fund that focuses on investments in established market companies (mostly in the U.S.) that utilize AI in within their business practices and provide AI services to other businesses. The fund takes an approach by examining disclosures, product lineups, official communications and other relevant information to determine the extent of the companies' involvement in AI and big data. The components of AIQ are assigned weights based on market capitalization, with adjustments made twice a year and a full reorganization annually. The ETF was first issued by Mirae Asset Management in 2018 and currently has $1.7 billion in assets under management (AUM). It has a 0.68% expense ratio, representing the annual costs when investing in the ETF. Now, with AI stocks experiencing a boom over the past year, investors may look for options to ride the hype and invest in a diversified asset to participate in the immense growth of the technology. Thus, this article will provide an overview of the AI ETF and explore alternative funds for comparison. Holdings ETF.com Meta Platforms (META): As the world's largest social media platform, Meta Platforms creates products for global social connectivity through mobile, PC, VR, and wearables. Its segments include Family of Apps (Facebook, Instagram, Messenger) and Reality Labs (VR technology). After shares fell nearly 70% in 2022 as a result of losses related to its metaverse investments, shares have rebounded sharply as its profit growth returned. NVIDIA (NVDA): Being known as the 'most important company in the world' in the current market, NVIDIA stands at the center of AI development through its semiconductors, which are used to build AI applications. The semiconductor company is renowned for its graphics, computing, and networking solutions worldwide. As revenue surged 265% in its fourth-quarter earnings, shares are up 242% year-over-year (YoY). Netflix (NFLX): Netflix faced a similar fate as Meta Platforms in 2022, as shares fell over 70% from their all-time highs due to stagnating user numbers. Nevertheless, due to its efforts to crack down on password sharing, shares have rebounded steadily and are now trading just below all-time highs. As Netflix is integrating AI in content creation, investors are looking for an opportunity on cost reduction as well as an expansion in content, for instance through interactive content. Shares of Netflix are up 86% YoY. Amazon (AMZN): The world's largest e-commerce company is a leader in AI development, particularly within its cloud computing service segment AWS. Despite generating over $500 billion in revenues, Amazon continues to grow at double digits, while its operating income has surged over the past few quarters. As a result, the stock is trading 93% higher compared to the same time last year. International Business Machines (IBM): As IBM struggled to regain lost market share to Apple (AAPL) and Microsoft (MSFT) in the PC industry, IBM's latest efforts in AI and Quantum Computing are bringing up fresh hopes for a new growth era of the legacy tech firm. Indeed, the demand for IBM's software and consulting services appears to pick up after decades of negative revenue growth. Furthermore, IBM has shown success in becoming a more capital-efficient business, growing its annual cash flows in 2023. Shares are up over 40% YoY. Other Holdings: Similar to the NASDAQ Composite (COMP:IND), the ETF is well diversified, with 87 holdings in total. Here, other notable AI picks include Microsoft, ServiceNow (NOW), and Salesforce (CRM). However, as opposed to the NASDAQ Composite, the ETF also includes foreign AI stocks, such as Tencent Holdings (OTCPK:TCEHY) and Samsung Electronics (OTCPK:SSNLF). Here Samsung is increasingly focusing on supplying AI semiconductors. Overall, the ETFs allocation is highly concentrated on U.S companies, accounting for 74% of its assets, followed by China (6.9%), Korea (4.7%) and Germany (4.2%). Overall, the order of this allocation closely follows the overall share of global AI development, although companies from Japan are less represented in the ETF. Performance Data by YCharts AIQ ETF has been a top performer, compared to alternative AI ETFs such as iShares Robotics and Artificial Intelligence Multisector ETF (IRBO) as well as Robotics & Artificial Intelligence ETF (BOTZ), also issued by Global X ETFs. Similarly, IRBO is a thematic fund that focuses on companies that are involved in the development of AI technologies and shares various names with AIQ such as NVIDIA, yet also focuses on small-cap tech names such as Silicon Laboratories (SLAB). Thus, the weighted average market cap of IRBO's holdings currently stands at $158 billion, compared to AIQ, which boasts an average weighted market cap of $497 billion. Since small-cap tech stocks generally lagged behind their large peers, IRBO underperformed. Based on its costs, the ETF is slightly cheaper with an annual fee of 0.47%. AIQ also significantly outperformed BOTZ, which also focuses on global public AI companies. While BOTZ also holds many U.S companies, it places a much higher weight on Japanese and Swiss tech names, such as Keyence (OTCPK:KYCCF), Daifuku (OTCPK:DFKCY) and Yaskawa Electric Corporation (OTCPK:YASKY) and ABB (OTCPK:ABBNY). The ETF is also much more concentrated with just 44 holdings and NVIDIA holding a weight of nearly 20%. As shown in the graph above, BOTZ is therefore more volatile and susceptible to the developments of individual companies. Its expense ratio is similar to AIQ at 0.68% annually. Overall, AIQ performed nearly identically to the Nasdaq Index (QQQ), although QQQ has a lower expense ratio of just 0.2%. Valuations Data by YCharts Although it is unsurprising that Tech/AI stocks are pricey based on historic valuations, their growth rates have continuously surpassed estimates in recent quarters, demonstrating the strong underlying demand for AI infrastructure. For example, Nvidia has consistently surpassed EPS estimates by double-digit percentages over the few past quarters, which is why the stock is pricing in further EPS growth. Thus, given its seemingly expensive valuation of 71 times Price to Earnings (P/E), Nvidia trades at just 30 times P/E, given its strong EPS growth continues. Moreover, Nvidia appears expensive on a revenue basis, trading at nearly 40 times its current sales. However, if Nvidia is able to grow its revenues to over $200 billion by 2030, as expected by estimates, its valuation would stand at 'only' 10 times P/S. Nevertheless, if Nvidia does not meet expectations, its valuation could quickly adjust, which could drag down the valuation of the entire AI sector. While the ETF has many pricey stocks based on traditional valuation metrics, its foreign AI stocks are less expensive on a subjective level. Here, Samsung trades at just 15 times P/E and 2 times Price to Sales, while Tencent's P/E is even lower at just 13x. Nevertheless, these companies hold lower profit margins and in the case of Tencent, are arguably more susceptible to regulations, which could impact their growth. Overall, the ETF has an average P/E ratio of 36.6, which is slightly higher than QQQ, with an average P/E of 34.4. Takeaways As artificial intelligence becomes more integrated into daily life, the market for AI solutions could grow to a staggering $1.8 trillion by 2030. Investors who would like to gain exposure to this immense growth could either directly invest in AI-related companies such as NVIDIA or Meta, or through an ETF such as AIQ. Here, AIQ ETF offers a balanced and diversified approach to gaining exposure to the growth of AI. However, given the little differentiation in its core holdings compared to QQQ, its expense ratio of 0.68% appears to high, given QQQ costs just 0.2% per annum. For larger investments with a longer holding period, QQQ may thus be the better option. While AIQ offers long-term growth potential, various risks remain. As opposed to other technologies such as the Internet, AI will likely face greater regulations, in my opinion. The number of bills to regulate AI is already growing, and this could hinder the growth of the overall adoption. As a result, the growth of AI-related companies may be slower than expected, leading to a possible contraction of valuations. Moreover, the impacts of US-China regulations of AI chips on NVIDIA and the overall market in the future are still unclear, which could also take a toll on sentiment going forward. Nevertheless, AIQ certainly offers an opportunity to participate in the AI race, regardless of the uncertainties.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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